Chinese inflation: Why it matters here

By Chris Isidore, senior writer


NEW YORK (CNNMoney.com) -- Inflation is picking up in China, sparking U.S. concerns that reining in growth there could have negative consequences here.

Some fear that a pullback in China's overheated economy could hurt markets here, by cutting Chinese investment in U.S. stocks and Treasurys. And the higher inflation reading, coupled with 12% annual economic growth rate in the first quarter, is setting off alarm bells around the world.

"Generally with runaway growth comes runaway inflation, so China has got to slow itself down," said Kevin Giddis managing director of fixed income at Morgan Keegan. "I don't think they can continue to grow at this pace without affecting us in one form or another."

China's National Bureau of Statistics reported Tuesday that overall prices were up 2.8% from a year ago, and that food prices rose 5.9%. The producer price index, a measure of wholesale prices, rose even more, up 6.8%.

In April, all the inflation rates there picked up from March. A year ago, overall prices and food prices were both falling in China.

While the inflation numbers were roughly in line with forecasts, concerns about what happens if the Chinese hit the brakes on growth too hard helped spark a sell-off in major stock indexes across Asia on Tuesday.

The People's Bank of China has already taken a number of steps to curb growth, including raising reserves that banks are required to hold. Next up could be raising interest rates, which have remained unchanged since late 2008, and even letting its currency, the yuan, rise in value.

The yuan is essentially pegged to the dollar and letting it rise would mean that the Chinese central bank would not need to buy as many U.S. Treasurys and dollars to maintain that peg, leading to a rising yield.

But Giddis said uncertainty over the European debt crisis, which sent investors fleeing for the safety of U.S. debt, could soften the impact of a Chinese flight from Treasurys.

"If those concerns are with us for the year, they would offset a loss of demand for Treasurys from China," Giddis said. But if the crisis in Europe is settled at the same time that China pulls back on its purchases of U.S. Treasurys, it could cause yields on those bonds to rise by 1 to 1.5 percentage points.

Other experts say that China is likely to hold off on making any drastic moves to curb inflation until it sees how the crisis in Europe plays out.

"Given everything that is happening in Europe, they would want to see that stuff settle down," said Jay Bryson, international economist with Wells Fargo Securities. To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Overnight Avg Rate Latest Change Last Week
30 yr fixed3.84%3.80%
15 yr fixed2.95%2.90%
5/1 ARM3.23%3.05%
30 yr refi3.84%3.81%
15 yr refi3.01%2.96%
Rate data provided
by Bankrate.com
View rates in your area
 
Find personalized rates:
Index Last Change % Change
Dow 17,672.60 -141.38 -0.79%
Nasdaq 4,757.88 7.48 0.16%
S&P 500 2,051.82 -11.33 -0.55%
Treasuries 1.82 -0.08 -4.17%
Data as of 11:41pm ET
Company Price Change % Change
Bank of America Corp... 15.73 -0.36 -2.24%
General Electric Co 24.48 0.20 0.82%
Apple Inc 112.98 0.58 0.52%
Avon Products Inc 7.98 -0.68 -7.85%
Intel Corp 36.44 -0.46 -1.26%
Data as of Jan 23

Sections

The gender equality campaign HeForShe, which gained widespread attention in September, has now become a little more corporate. More

The euro slid early Monday after anti-austerity party Syriza's victory in Greek elections this weekend added to concerns over the currency's stability. More

Hershey has forced an importer to stop selling proper British chocolates in the United States, angering fans of Cadbury and Toffee Crisps. More

Target-date funds have become a wildly popular option among those seeking a hands-off approach to retirement investing. But not all of these funds are created equally. More

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2015 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2015. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2015 and/or its affiliates.